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Glyndon Park was founded by a CFA Charterholder with more than seventeen years of financial services experience with top tier institutions including The Federal Reserve, Morgan Stanley, and Goldman Sachs. Glyndon Park brings the above experience to offer investment management services across... More
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  • Greenspeak: Market Commentary And Update - Volume II

    The 10 Things I think I think about the market

    1. The Fed's chatter is having the desired impact on stocks - pricking the balloon in high flying names while most large caps tred water or are modestly down. Rational Exuberance as they say.

    2. Gene McQuade is a great pick for Citi (NYSE:C) to solve their Capital Planning issues. As the #2 man at Freddie Mac he know the political spectrum

    3. Gene McQuade is a terrible pick for Citi. Freddie blew up with too little capital. Although he was out the door at that point.

    4. Private sector highering is encouraging for the economy and I don't see any path for downward rates.

    5. Credit Michael Lewis for bringing HFT to the forefront and stirring an incredible debate.

    6. Why does GM always stumble in public relations?

    7. The three classes of Google (NASDAQ:GOOG) stock shows the insiders are way to concerned with control. They are a highly credible management team and the share scheme strikes me as lacking self esteem.

    8. Very curious what Gary Kain and the American Capital (NASDAQ:AGNC) team are up to with their mReit holdings.

    9. TXU is nearing a bankruptcy or restructuring. The fact this didn't move the needle is a great sign for the credit markets.

    10. Good luck in your new firm Stephen Cohen.

    Tags: GOOG, AGNC, C
    Apr 08 12:01 AM | Link | Comment!
  • Volatility Is Cheap: Strategy To Extract Gains From Market Volatility Regardless Of Market Direction

    The stock market continues its multi-year bull run with the S&P 500 has hit new highs. Investors are showing little fear of market decline to a point of unhealthy complacency. One measure of investors perception of market risk is the prices they will pay for options hedging against market changes. For large capitalization stocks the best indicator is the S&P100 volatility index. The index measures the implied level of anticipated pricing changes exhibited in short term options prices. Looking at the below the index is sitting near a five year low.

    We recommend a strategy to take advantage of these low levels through the purchase of an option straddle. An option straddle is the simultaneous purchase of a put and a call with the same strike price. Investors can profit if the market moves either up or down by more than the premiums paid.

    Another strategy is to buy or sell the underlying index regularly to bring the position back to delta neutral. The investor will gain from any market movement regardless of direction. Any gains will be offset by the time decay inherent in options. In essence the investor gains if the market move in either direction is large enough to overcome the loss in time decay.

    (click to enlarge)

    Let's look at an example to demonstrate the delta neutral strategy, where the investor an realize a gain even in the event the index closes at the straddle strike price.

    • An investor purchases an OEX straddle a put and call at $5.20 and $5.85. OEX options are 100 times the index and there fore have a market value of $520 and $585 respectively.
    • Looking at the second day the index closes at 820 with the put and call at $1.08 and $16.08 respectively. The next step is to calculate the delta neutral position. This is done by taking the sum of the call delta and put delta from the Black-Scholes pricing model and multiplying by the index value (100x time the index value in the case of the above options) In the example below this creates a short exposure of $57,564. The investor would then execute a transaction offsetting this exposure by purchasing 70.2 units of the index. For the OEX investors can purchase shares of the S&P100 ETF (NYSEARCA:OEF) or use the market value equivalent of the S&P500 (NYSEARCA:SPY) This results in a long exposure of $57,564 in the ETF. Therefore the investor is now in a delta neutral position. The profit and loss for the day is the change in market value of the options plus the change in value of the beginning of day ETF position. Since the investors held no shares in the ETF at the beginning of the day the P&L is zero for the index but a gain of $611 overall.
    • On the third day the index value returns to 835, a value that would be harmful if there was no daily adjustment to a delta neutral position. Repeating the same exercise in day two the investor will notice their long position in the index increase in value along with their call option offset by losses in the put option generating a positive profit and loss of $421. Note without delta adjusting the investor would incur a loss of $100. The investor must once again recalculate their delta adjusted options exposure. In this case the options have a long market exposure of $542. To offset the exposure the investor requires a short position of 0.64 index units meaning they would sell 70.82 units at the closing price. (Long 70.2 units day prior to a now short position of 0.64 units)

    This process is repeated each day until the options expire. Note that the days in which the profit loss are negative the day to day change in index value is small either positive or negative. On days the index change is large the portfolio gains regardless of direction.

    In the below example we returned the index value to the straddle strike price at expiration. In this case the options both expire worthless and without delta adjusting the investor would have realized the maximum loss on a straddle. But because the positions were delta adjusted each day the portfolio showed an overall gain.

    Delta Adjusting Options Strategy
    ABCDEFGHIJKLMNO
    DayOEX ValueCall ValuePut ValueCall Market ValuePut Market ValueCall DeltaPut DeltaOptions Delta Adj Market ValueIndex PositionIndex Market ValueCall Gain/LossPut Gain LossIndex Shares Gain LossTotal P&L
        C X 100D X 100  (G + H) X 100(I / B) X -1J X BCHANGE IN ECHANGE IN FCHANGE IN INDEX X PRIOR DAY J 
    18355.25.85$520.00$585.00         
    28201.0816.08$108.00$1,608.000.1490-0.8510$(57,564.00)$70.20$57,564.00$(412.00)$1,023.00 $611.00
    38355.425.42$542.00$542.000.5032-0.4968$534.40$(0.64)$(534.40)$434.00$(1,066.00)$1,053.00$421.00
    48407.262.25$726.00$225.000.6809-0.3191$30,391.20$(36.18)$(30,391.20)$184.00$(317.00)$(3.20)$(136.20)
    585217.150.16$1,715.00$16.000.9605-0.0395$78,469.20$(92.10)$(78,469.20)$989.00$(209.00)$(434.16)$345.84
    68438.760.75$876.00$75.000.8318-0.1682$55,941.48$(66.36)$(55,941.48)$(839.00)$59.00$828.90$48.90
    78321.474.46$147.00$446.000.3307-0.6693$(28,171.52)$33.86$28,171.52$(729.00)$371.00$729.96$371.96
    883500$-$-00.0000$-$-$-$(147.00)$(446.00)$101.58$(491.42)
                   
                   
               $(520.00)$(585.00)$2,276.08$1,171.08

    Conclusion

    The delta adjusting strategy with options allows investors to profit or loss from purchasing (or selling if the above were reversed entirely) volatility. In the current market environment volatility is at multi-year lows and should the actual market volatility be greater than that implied investors can use the above strategy to profit from regardless of the overall market direction.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Apr 03 8:34 AM | Link | Comment!
  • Greenspeak: Strategy And Market Commentary Update

    Greenspeak: Our Weekly Strategy and Commentary Update

    Citigroup

    We wrote a piece early this week regarding Citigroup and the franchise value. There is clearly a disconnect between Citigroup and its most critical regulator. The fact that a bank after three years generating positive financial results doesn't have the Feds confidence is concerning. I suspect this comes down to what Citigroup is as an institution is. To be Citigroup you have to be big - that is there value proposition - making the globe small for institutions seeking to business in multiple regions and countries. There is just no other way. Citi has done there best to do everything else. Domestic retail - outside of NYC is a failure. Investment Banking - Can you spell CDOs - major fail. Asset Management - How much did they pay for Old Lane? Fail.

    This puts Citigroup on a collision course with regulators determined to get away from TBTF. The other banks who rely on retail branches, investment banking, and traditional commercial banking we see the business model succeeding whether TBTF or not and can be easily salvaged in pieces.

    While it may be painful for Citi shareholders foregoing dividends and share buybacks until 2015, if they do execute and pocket another $5Billion+ in earnings, the Fed will be under intense pressure to approve a plan next year, otherwise risk losing credibility.

    Market Strategy

    The NASDAQ steep decline this week reminds us that there is Beta. The market valuations may have gotten away from us in the higher risk market sectors. The NASDAQ, Biotech, and Russell 2000 all underperformed. The money seems to have found a home in large cap names with the DJIA modestly positive. (NYSEARCA:DIA) Don't look now but some of the beaten down telecom's like AT&T (NYSE:T) and Century Link (NYSE:CTL) are on the rise. We expect this trend to continue as the Fed and rates will remain at the forefront of investor's concerns - the safe established names are the place to be.

    Ten Things We think we think

    1. Darden's (NYSE:DRI) management is in real trouble. Most investors give management the benefit of the doubt as activist's show up looking to make a quick buck and move on. Darden could not have handled this situation worse canceling analyst meetings and refusing shareholder votes.

    2. Citigroup is like the Buffalo Bills of the 1990s (We wish Jim Kelly the best) consistently a great franchise but just cannot some to get there. Its obvious the Fed just doesn't like their global super bank model. Time to hunker down and get the risk management infrastructure in place. If they fail again after pulling in $5 billion in profits the Fed's test won't have credibility.

    3. Elon Musk is walking a fine line in the political arena in the dealer model debate. Tesla (NASDAQ:TSLA) generates a substantial amount of revenue, about 10%, from environmental credits sold to other manufactures. A public battle with statehouse politicians and those things can suddenly be altered or go away. It's interesting this debate pits the environmentalists alongside free marketers.

    4. The Ukraine situation continues to make headlines. Odds are a resolution is near and will cause little disruption in the short-term. Long run Europe, therefore global markets, has an issue with Russia and its likely this isn't the last time they will flex their muscle. Europe needs to take steps to reduce their economic dependency on Russia, especially energy.

    5. Facebook's (NASDAQ:FB) acquisition strategy is starting to resemble my kids in an electronics store. I hope I'm wrong but they may buying what's "cool" rather than what's commercial.

    6. Blackberry. When you say this word in year people will assume you mean the fruit. This company and brand is dead.

    7. Herbalife. At this point we have two media hungry activists engaged in an all out battle. Is it really about the value of the company anymore?

    8. Michael Lewis's book on flash trading is sure to be a great read.

    9. Biotech was pummeled this week. Expect a few large pharmaceuticals without drug pipelines to start sniffing around.

    10. The pace of housing starts amazes me. Eventually population growth has to catch-up with the low housing production but the question is when and maybe as importantly has housing changed away from the McMansion to urban living, if so which builders win?

    Enjoy the week and stay rational and exuberant.

    Disclosure: I am long C, DRI, T, CTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Mar 31 7:47 AM | Link | 2 Comments
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